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Reinsurance Pricing Subdued

Despite 2011’s disasters, the only big increases are seen on policies covering affected nations.

Reinsurance brokers say the most expensive year for natural disasters didn’t drive coverage prices higher across the industry when policies were renewed on Jan. 1.

Reinsurers’ strong capital base meant only insurance policies covering nations the most affected by catastrophes, such as Japan, Thailand and New Zealand, faced significant increases, James Vickers of Willis Group Holdings Plc said.

Rates in many other lines of business “have hardly moved at all,” even as reinsurance companies lost money on their underwriting, Vickers, chairman of Willis Re’s international and specialty reinsurance unit, said by phone. “There is not a blanket increase. On accounts where clients had losses, prices have gone up considerably more than 10 percent.”

Last year was the priciest 12 months of natural disasters on record for reinsurers and the primary insurers whose risks they help bear, Munich Re, the world’s biggest reinsurer, said on Jan. 4. Earthquakes in Japan and New Zealand and Australian and Thai floods helped cost the industry about $105 billion, surpassing the previous catastrophe record of $101 billion in 2005, when reinsurers were forced to raise capital in the wake of Hurricane Katrina.

Reinsurers covered about half of those insured losses, according to Willis, the world’s third-biggest reinsurance broker. Vickers estimated that the industry’s capital at the end of the third quarter was at the same level as the start of 2011, meaning more reinsurers were healthy enough to compete for business on price.

“It was a disappointing renewal season” for reinsurers hoping to charge more, David Watson, head of XL Group Plc’s European division, said on a Jan. 3 conference call hosted by Keefe Bruyette & Woods Ltd. “There was really no significant upward movement in trading conditions.”

About two-thirds of property-and-casualty reinsurance contracts of companies such as Munich Re, Swiss Re and Hannover Re are typically up for renewal in January. The remainder is renewed in April and July, with a focus on the Asia-Pacific region and the U.S.

Rates for casualty policies, which pay out if individuals and companies are liable to pay compensation, were generally the same as a year ago, while the price of airline insurance dropped about 7 percent, Watson said.

Premiums for international catastrophe policies increased about 2.7 percent in Europe’s main insurance markets of Germany, France, Belgium, the Netherlands, Luxembourg and Scandinavia, Watson said. That’s less than the 3 percent inflation rate in the euro region.

Peak Catastrophe Areas

JPMorgan Chase & Co. analysts including Matthew Heimermann also estimate that casualty prices were little changed from a year earlier, according to a Jan. 2 note to investors. Property insurance increases were closer to 10 percent, they said.

Only catastrophe-exposed contracts and contracts affected by losses saw “significant improvements to rates,” Brian Boornazian, head of reinsurance at Bermuda-based Aspen Insurance Holding Ltd., said during a Jan. 3 conference call hosted by Evercore Partners Inc. “More change is needed to reach rate levels that are adequate for exposures, and other external facts that affect our industry’s profitability.”

The so-called peak areas for catastrophe insurers are U.S. earthquake and hurricane coverage and European windstorms. While such events didn’t much hurt reinsurers in 2011, the industry was surprised by the magnitude of losses elsewhere, such as the Thai floods, according to Dominic Christian, co-chief executive officer of Aon Benfield Group Ltd., the world’s biggest reinsurance broker.

“If there are losses in non-peak zones, it makes you wonder if you are applying the right diversification features,” Christian said in a phone interview from London.

Munich Re estimates losses from the Thai floods, which inundated factories and disrupted Japanese companies’ local supply chains, cost $10 billion. While prices in affected areas of Asia such as Thailand have increased at least 50 percent, they haven’t risen in other countries, according to XL’s Watson.

“In Thailand, the losses are just unbelievable,” he said. “What surprises me is that although reinsurers have addressed exposure in Thailand, they still provide uncapped pro-rata treaties providing net cat coverage elsewhere in the world,” Watson said, referring to policies that provide unlimited coverage against natural catastrophes.

Globally, policies covering disasters in multiple regions rose a minimum of about 2 percent, Nick Frankland, CEO of the European operations of the reinsurance brokerage of Marsh & McLennan Cos., said during the KBW conference call.

Capital Concern

Willis Re says catastrophe reinsurance prices are jumping from 80 percent to 150 percent in New Zealand, where the Feb. 22 earthquake is estimated to have cost $13 billion, according to Munich Re. In Australia, catastrophe premiums have risen 40 percent to 75 percent, Willis says.

The earthquake in Japan on March 11 and the ensuing tsunami caused insured losses of as much as $40 billion, according to Munich Re. Severe storms in the U.S. in April cost about $7.3 billion, while Hurricane Irene is estimated to cost $7 billion.

Willis’s Vickers said broad-based price increases are only likely if the sovereign-debt crisis worsens and erodes capital. In 2008, writedowns on equity investments and other losses related to the financial crisis prompted reinsurers to increase prices in the January 2009 renewal season. Rates declined again in the following two years, mostly because of an absence of major natural catastrophes.

“Capital ultimately is what drives pricing,” Vickers said.

Bloomberg News

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